The abbreviation “PL” means “Party Logistics Provider” and is a supply chain model for logistics specialists.
There are different ways in which companies manage logistics. Some have their own fleet of vehicles and drive the transports themselves. Others hand over the complete organisation and management of the transports to a service provider. What these different models entail is explained in the following part:
1PL – First Party Logistics Model
- With the First Party Logistics Model (1PL), the company which produces the goods, takes over the transport and logistics services himself.
- The company carries out all necessary activities and has expensive equipment such as trucks, trailers, warehouses, etc.
2PL – Second Party Logistics Model
- The Second Party Logistics Model (2PL) stands for the outsourcing of transports to a contractually bound logistics partner. The shipper of the goods outsources transport and storage services to a logistics service provider, but still retains control and administrative management of the logistics.
- The logistics service provider generally owns and operates its own facilities.
3PL – Third Party Logistics Model
- The Third Party Logistics Model (3PL) is a common model in commercial shipping. This model may also include a variety of other services such as delivery, labelling, product packaging and customs clearance.
- As defined by the Council of Supply Chain Management Professionals, an external logistics provider performs transportation, warehousing, packaging, forwarding, cross-docking, and inventory management functions.
4PL – Fourth Party Logistics Model
- With the Fourth Party Logistics Model (4PL), the shipper outsources the operational handling of the transport and warehouse service as well as the administration of logistics.
- The 4PL service provider takes over the entire supply chain operation. It links producers, suppliers, retailers, IT service providers, financiers and logistic providers.
- Key feature: The service provider does not operate a facility-based business model, nor does it own a warehouse or a fleet of vehicles that could be used to carry out the transports.
- Instead, the logistics service provider organizes, manages and monitors the transports.
- This model is more integrated than the most popular third-party and previous models.
5PL – Fifth Party Logistics Model
- A Fifth Party Logistics Model (5PL) can be used when converting from supply chains to supply networks.
- The 5th Party logistics provider can consolidate the requirements and capacity of 3PLs and 4PLs. A 5PL negotiates favourable tariffs and services with service providers such as forwarders and airlines. It also offers its customers strategic and innovative solutions and concepts.
- The tasks of 5PL service providers include providing a framework for planning and implementing multiple parts of the supply chain. This includes the provision of materials, services, information and also capital flows required for the planning, delivery and tracking of transportation.
The advantages and disadvantages of 1PL and 2PL
- No disclosure of sensitive data to third parties
- The company builds up internal know-how by carrying out its own shipments
- The shipper has control over all steps during transport.
- The company has a simple communication through internal procedures
- Investments in own assets, e.g. in a vehicle fleet, entail risks and have an influence on the liquidity of the company.
- The core competence of the company is usually not transport, which is why expert knowledge could be less developed.
The advantages and disadvantages of 3PL, 4PL, 5PL
- The company no longer needs to invest in transport resources, because these are no longer necessary by handing them over to external logistics providers.
→ There is a low capital commitment due to the omission of assets.
- The shipper benefits from the logistics know-how of the service provider:
→ All players concentrate on their tasks, which is why quality and efficiency increase and service is improved.
- There is the possibility of losing know-how and thus the probability of no longer being able to take over services internally at short notice if the logistics partner should fail.
→ The dependency on the logistics partner increases accordingly.
- Sharing sensitive company information with external partners
- Companies have less control over their transports. This can lead to errors or damage in the deliveries that are not noticed by the company, resulting in reduced service and dissatisfaction of the end customer.
There is no “one size fits it all”. Which model suits best a business depends on the needs and requirements of the company itself. With the different models there are advantages and disadvantages.
If one gives away control, the logistics partner has to be chosen carefully. Trust needs to be build in order to ensure good communication between the company and the service provider. This is essential to make the delivery process as smooth as possible. This enables all partners to focus on their core competencies and generate effective results.
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